Week 28 Overview
The 28th week showed that Europe and Russia are equally suffering, but it seems that the latter is playing cat-and-mouse with the former. Moscow is entering in Brussels’ backyard quite extensively, as Gazprom’s visit to German Vice-Chancellor Sigmar Gabriel demonstrates.
Chances are that the Kremlin is slowing down the Turkish Stream to take time to see its opportunities with Germany. At the end of the day, Russia simply wants to export its gas to Europe. Going through Turkey or Germany would not make much of a difference for Gazprom and Moscow.
Against this backdrop, the most concerning European problem stems from the Greek crisis, while Russian difficulties might have to do with a wrong strategy that could lead Moscow to disappoint both Ankara, and Berlin. At the same time, financial constraints will be a source of concern for both the European Union and Russia.
EUROPEAN MATTERS
The future of Europe’s energy policies will much depend on Brussels’ ability to find a compromise for the Greek crisis. An eventual GRexit would have knock-on effects on energy projects, regional balances and climate change too. A GRexit would not then only be a regional source of instability. It could send shockwaves worldwide.
France-headquartered Technip said it is anticipating ‘an even more challenging environment in oil & gas.’ It launched its restructuring plan to save approximately €830 million while confirming its focus on LNG.
LNG projects might go through difficulties too. As Lithuania's Energy Minister does not deny the country is in talks with Norway’s Statoil over a more flexible LNG supply schedule to a LNG terminal in the seaport of Klaipeda, the Government may also ask for more suppleness from Norway’s Höegh LNG. Höegh is the leaseholder of the floating storage and re-gasification unit (FSRU) in its seaport.
RUSSIA: PROBLEMS WITH TURKISH STREAM?
Although the Russian economy is on its way to recovery, it is obvious that neither the Russian government nor Gazprom have the finances in place for the entire Turkish Stream project. As the project will be completed in stages, the first phase of the project plans to end in 2017 for the Turkish Market while the other three phases thereafter plan to be complete by 2019.
After witnessing its shares going up and down over the last days, Saipem received notification of the termination for convenience of the South Stream BV contract. The ENI’s subsidiary wrote it on Thursday, explaining it received the communication late in the evening of Wednesday.
This could be a sign of weakness, which adds to previous difficulties. A few hours before, Gazprom told pipeline makers to suspend deliveries of pipes for expanding Russia's network to be connected to the proposed Turkish Stream project, an industry source told Reuters on Monday.
These developments might not be signs of weakness. As said, they might be related to Gazprom’s resolve to explore the German option. Gazprom said that German Vice-Chancellor Sigmar Gabriel supports Russian intentions to build new pipelines to Europe. The Russian company said that Nord Stream 2 would enhance reliability of Russian gas supplies to Europe.
The combination of these events could create more uncertainties. The Trans-Adriatic Pipeline and the Turkish Stream pipeline are poised to repeat the same mistakes of their more famous predecessors – the Nabucco and South Stream pipelines. Both raise more questions than answers and are tools of foreign policies for different states rather than real objectives, Jarosław Wiśniewski wrote.
The last week raised another question. While Russia has repeatedly announced that Gazprom is ready to export gas to Azerbaijan by the end of 2015, there is not any concrete message from Baku to confirm any demand for Russian gas. SOCAR denies Azerbaijan needs to import gas from Russia.
Finally, it is important to note that Russia can also play with other European alternatives. Europe could take advantage of global LNG dynamics, but much of the evolution of the European LNG market depends on Gazprom’s decisions in the short to medium term, The Oxford Institute for Energy Studies wrote in a note published on Monday.
AZERBAIJAN AND SOUTH-EAST EUROPE: TAP TOP PRIORITY FOR EU SECURITY
Trans Adriatic Pipeline AG (TAP) announced the start of construction and rehabilitation work on access roads and bridges along the pipeline’s route in Albania. According to Albanian officials, TAP will stimulate other foreign investments in the country.
The European Commission confirmed that the Trans Adriatic Pipeline (TAP) and interconnectors to and from Bulgaria are its top priorities to diversify supply sources. Thirteen nations, mainly from the former Soviet bloc, signed the Memorandum of Understanding in Dubrovnik on Friday. The document formally launches the cooperation initiative backed by European authorities.
European banks are taking an active role too. The European Investment Bank (EIB) could soon increase its support to “gas projects" from €520 million, already lent in the last 5 years, to €869 million. The EIB confirmed on Tuesday it has appraised and has negotiated two projects with PGE.
Regional cooperation could help too. Romania has invited Serbia to take part in the AGRI project, which is to deliver liquefied natural gas from Azerbaijan to the Western Balkans, and the two states agreed to also work together on developing a gas interconnection. Serbian Minister of Energy Aleksandar Antic said that participation in the project “is a way for Serbia to secure new gas supply sources.”
Also private companies are taking steps. Latest developments seem to indicate that Hungary’s MOL is successfully proceeding with its internationalisation strategy in the upstream sector, and it is also moving on with downstream activities in Romania. The company wants to enter Norway and enhance its international exploration portfolio.
UKRAINE: PROBLEMS, AND EUROPEAN HOPES
Ukraine is going through unprecedented challenges. In the coming 7 months, Kiev is called to (i) implement the conditions of the Minsk agreement by the end of the year, (ii) prepare the country’s economy to make the most of a free trade agreement with the European Union to be implemented in January 2016, (iii) meet the conditions for a visa liberalisation program with Brussels, and (iv) proceed with a debt restructuring with the IMF.
Kiev is trying its best. Ukraine’s overall consumption levels fell from 50.4 bcm in 2013 to 42.6 bcm in 2014, and are projected to drop further to 34 bcm in 2015. According to Stratfor, negotiations between Ukraine and Russia will continue, though real urgency to strike a deal will only be felt after summer because Ukraine has enough alternative resources and stored supplies to meet demand for several months.
In the long run Ukraine cannot only rely on gas from the European Union, but gas from Slovakia remains crucial for the country, especially in the mid-term. It comes as no surprise that Naftogaz said it is ready to discuss conditions under which its booked capacities could be used by other shippers. Doing so, the Ukrainian company invited shippers to import gas to Ukraine via Slovakia.
UK AND SHALE GAS IN FRANCE, NETHERLANDS
NBP price for 2015 is expected to be on 2014 levels, said Cedigaz on its blog. The organisation added that tensions between Russia and Ukraine, and the drop in Dutch production will be determinant factors in the price definition.
Meanwhile, the UK oil and gas industry welcomed the new Energy Bill introduced into the House of Lords on Thursday. The Bill will hinge on two pillars. Firstly, it commits to support development of North Sea oil and gas, while increasing local people’s voice on new onshore wind farm applications. At the same time, the Bill formally establishes the Oil and Gas Authority (OGA) as an independent regulator.
After playing a role in the recent British elections, shale gas is likely to be an important factor to take into consideration in France too. “I don’t understand why we should not explore our resources on principle as this source of energy could lead to jobs and wealth,” said Maud Fontenoy, who endorsed Nicolas Sarkozy's re-election campaign in 2012.
Companies are trying to make shale production more efficient. US-headquartered General Electric (GE) and Norway’s Statoil are joining forces to increase efficiency and sustainability of onshore unconventional projects. ‘GE and Statoil’s Sustainability Collaboration has launched the call for entries for its second Open Innovation Challenge focusing on water usage in the development of onshore unconventional oil and gas reservoirs’ reads a note released by Statoil on Tuesday.
On the other hand, the last week witnessed a setback for shale. The Dutch government said on Friday it would ban shale gas drilling for five years. It decided not to renew existing exploration licences due to uncertainties about the environmental impact.
ISRAEL NEEDS EUROPE
The Israeli government, which is going all out to promote the development of the Leviathan field, is trying to create a level playing field, but it needs foreign companies - possibly Europeans - to go there and invest. The Leviathan field requires a buyer, possibly a European buyer.
According to locals, more trust could be introduced through an ad-hoc institution addressing all the aspects related to the gas reserves in the country. Israeli researchers and politicians are increasingly calling for a stable regulatory framework.
Talks aimed at resolving the maritime border dispute between Lebanon and Israel are set to resume. Lebanon and Israel both claim an area of 850 square kilometers as their own. Lebanese officials hope that US and UN mediation will help demarcate territorial waters.
OTHER CONTRIBUTIONS, INTERVIEWS:
The growing potential of Europe’s “green gas” source
Statoil awards Baker Hughes services contract for Johan Sverdrup
Elements of an optimal fiscal regime for Romania’s offshore sector
Interview with Rusnák, Secretary General of the Energy Charter Secretariat, about Russia and Italy
Sergio Matalucci is an Associate Partner at Natural Gas Europe. He holds a BSc and MSc in Economics and Econometrics from Bocconi University, and a MA in Journalism from Aarhus University and City University London. He worked as a journalist in Italy, Denmark, the United Kingdom, and Belgium. Follow him on Twitter: @SergioMatalucci